SEC to investigate S&P for insider trading

Close-up of a man's eye peering through a magnifying glass. Veins are clearly visible in the magnified eyeball.

The SEC will take a close look at the recent actions of Standard & Poor's. (Photo Credit: CC BY/Okko Pykkö/Flickr)

Despite a makeshift agreement regarding the debt ceiling, the U.S. credit rating took a hit because of Standard & Poor’s credit downgrade from AAA to AA+. The series of events leading up to the credit rating penalty has set the Securities and Exchange Commission into action, reports the Financial Times. An S&P investigation is under way to determine whether the financial analysis agency participated in insider trading, a violation of state and federal law.

The rules of the game

Any insider trading detected on the part of Standard & Poor’s – betting on the failure of the U.S. economy for personal gain – will be viewed harshly by the SEC or any other federal investigative body. In order to save what some political commentators describe as a sinking ship of an economy, the Obama administration has encouraged the SEC to investigate claims by anonymous inside sources that S&P representatives knew “weeks ago” that the credit ratings agency would downgrade the U.S. credit rating, regardless of whether Congress came to a resolution on the debt ceiling.

If S&P knew what was going to happen – and participated in insider trading in order to profit from what it knew would happen – the organization may be no different than GOP Rep. Eric Cantor, who worked closely with Speaker John Boehner to fight against U.S. credit default. Sources indicate that Cantor talked a good game before cameras, but on the side he had money invested in ProShares Trust Ultrashort 20-plus Year Treasury ETFs that will generate handsome profit in the event of U.S. default.

The SEC’s examination staff can make a referral to the organization’s enforcement division if it is discovered that laws have been broken by Standard & Poor’s. Yet it is possible that no referral will be given, as the investigation is still in its early stages.

Proving insider trading is difficult

Considering that many traders are able to anticipate fluctuations in the market and bet accordingly on securities and currencies without insider data, pinning insider trading charges to Standard & Poor’s will no doubt prove difficult. The SEC remains in a more proactive phase of oversight than it had been before various high-profile Ponzi schemes made the headlines. Investigation of Wall Street hedge funds and their connection to the United States’ financial collapse in 2008 have only served to intensify the SEC’s efforts, as has the installation of the Dodd-Frank law last year.

S&P’s response to SEC investigation

An S&P spokesman addressed the SEC investigation Friday:

“S&P takes its confidential information and securities trading policies, and the related securities regulation, very seriously. Our policies prohibit analysts or rating committee members from trading and holding securities or options of the companies or governments they rate. In addition, we have long standing policies and procedures in place regarding the appropriate handling, use and protection of confidential information.”